Western Digital, Misunderstood Merger With Significant Upside And Limited Downside
Alex Zhao, CFA • 40 Comments
Alex Zhao, CFA • 40 Comments
The Street's Upcoming Affair With SanDisk
Tue, Feb. 23, 8:09 AM
- The agreement for Unis to make a $3.775B equity investment in Western Digital (NASDAQ:WDC) is off after a decision by the Committee on Foreign Investment in the U.S. to investigate the proposed deal.
- Western Digital (WDC) reiterates its commitment to the purchase of SanDisk (NASDAQ:SNDK). Under the terms of that deal, SanDisk owners will receive $67.50 in cash and 0.2387 shares of WDC for each share of SanDisk they own. This values SanDisk at $78.50 per share based on last night's closing price.
- WDC is subject to a $184M break-up fee if it walks away from the purchase.
- Source: Press Release
- WDC -8.9% to $42, SNDK -4.8% to $64.44 premarket
Mon, Feb. 22, 10:57 AM
- SanDisk (SNDK -1.1%) dropped 2% in the last few minutes on a Dow Jones report that Alken Asset Management, a key shareholder in Western Digital (NASDAQ:WDC), is opposing the company's $19B buyout of SanDisk due to its price.
- Alken, which owns about 2.2% of Western Digital, will vote against stock issuance that the company might need to wrap the deal, according to a letter to the board seen by The Wall Street Journal.
- Western Digital came to an agreement to acquire the flash storage maker in October.
Thu, Feb. 11, 5:38 AM
- Western Digital (NASDAQ:WDC) declares $0.50/share quarterly dividend, in line with previous.
- Forward yield 4.97%
- Payable April 15; for shareholders of record April 1; ex-div March 30.
Mon, Feb. 8, 2:37 PM
- Many tech stocks are seeing 6%+ losses as investors flee to safety yet again. The Nasdaq is down 3.4%, and the S&P 2.7%.
- As was the case on Friday following Tableau and LinkedIn's disappointing guidance, a slew of enterprise tech stocks are seeing big losses, with cloud software and security tech names well-represented on the casualty list.
- Also: Solar stocks are having another brutal day (TAN -6.7%) as energy stocks get routed amid fears Chesapeake Energy is close to bankruptcy. WTI crude oil is once more near $30/barrel.
- Enterprise software decliners: Adobe (ADBE -9.6%), Paylocity (PCTY -19.1%), Salesforce (CRM -9.9%), Workday (WDAY -12%), Guidewire (GWRE -12.5%), ServiceNow (NOW -11.5%), Zendesk (ZEN -13.8%), Paycom (PAYC -13.4%), Marin Software (MRIN -10.3%), Castlight (CSLT -8.4%), Cornerstone OnDemand (CSOD -12.1%), Atlassian (TEAM -13.2%), inContact (SAAS -9.6%), and Bazaarvoice (BV -14.5%).
- Enterprise security decliners: Palo Alto Networks (PANW -12.2%), FireEye (FEYE -9.8%), CyberArk (CYBR -11.5%), Proofpoint (PFPT -12.7%), Qualys (QLYS -8.9%), Imperva (IMPV -9.7%), Rapid7 (RPD -9.4%), and Barracuda (CUDA -8.4%).
- Solar decliners: SunEdison (SUNE -11.3%), SunPower (SPWR -8.8%), JinkoSolar (JKS -7.6%), SolarEdge (SEDG -7.9%), Yingli (YGE -7.1%), TerraForm Power (TERP -10.7%), and TerraForm Global (GLBL -9.2%).
- Other major decliners: Micron (MU -9.1%), Western Digital (WDC -10.5%), Arista (ANET -10.9%), Universal Display (OLED -10.6%), Rackspace (RAX -11.3%), Fitbit (FIT -8.7%), Nimble Storage (NMBL -11.3%), Sierra Wireless (SWIR -9.9%), Rocket Fuel (FUEL -9.8%), Knowles (KN -9%), Mitel (MITL -8.9%), and Alarm.com (ALRM -8.9%).
- Previously covered: Yelp, Cognizant, Tableau, Globant, Ambarella, European tech stocks
Fri, Jan. 29, 10:25 AM
- With expectations low thanks to weak PC sales and soft enterprise server/storage demand, Seagate (STX +11.7%) has surged after beating FQ2 estimates and providing light FQ3 guidance. Likewise, archrival Western Digital (WDC +11.2%) is faring well after posting mixed FQ2 results (revenue missed, EPS beat) and guiding light.
- Guidance: Seagate has guided on its FQ2 call for FQ3 revenue of $2.7B, below a $2.85B consensus. Western guided on its call (transcript) for revenue of $2.8B-$2.9B and EPS of $1.20-$1.30, below a consensus of $3.23B and $1.46.
Seagate details: Seagate's FQ2 EPS benefited from the repurchase of 2.9M shares at a cost of $107M. Non-GAAP gross margin was 25.6%, +140 bps Q/Q and -260 bps Y/Y, and within a 25.5%-26% guidance range.
Hard drive revenue fell 21% Y/Y to $2.73B; revenue from enterprise systems, flash, and other products rose 15% to $259M. Hard drive shipments fell 19% Y/Y to 45.9M, with average capacity rising 23% to 1.32TB.
Western Digital details: Non-GAAP gross margin fell 40 bps Q/Q and 200 bps Y/Y to 28.5%; Western had forecast GM would be "slightly up" Q/Q, and is against guiding for a Q/Q increase. No shares were repurchased. Hard drive shipments fell 19% Y/Y to 49.7M; enterprise SSD revenue rose 44% to $270M. Western estimates the total market (TAM) for hard drives was 115.1M units, down from 118.7M in FQ1 and 140.8M a year ago. 35% of revenue was PC-related
Regarding Chinese firm Unisplendour's planned investment (15% stake) in Western, the company says it continues working with U.S. regulators (the CFIUS), and expects a decision in February. Meanwhile, the SanDisk acquisition (expected to see less regulatory scrutiny) is forecast to close in calendar Q2.
- Western also rallied yesterday after SanDisk (SNDK +4.7%) posted a healthy Q4 beat and issued soft Q1 guidance (expected given NAND price pressure and Apple's outlook) on Wednesday afternoon. For its part, SanDisk is up 9% over the last two days.
- Seagate: FQ2 results, earnings release, slides (.pdf).
- Western Digital: FQ2 results, earnings release, datasheet (.pdf).
Thu, Jan. 28, 4:18 PM
- Western Digital (NASDAQ:WDC): FQ2 EPS of $1.60 beats by $0.06.
- Revenue of $3.32B (-14.7% Y/Y) misses by $30M.
Wed, Jan. 27, 5:35 PM| Wed, Jan. 27, 5:35 PM | 9 Comments
Wed, Jan. 27, 4:12 PM
- SanDisk (NASDAQ:SNDK): Q4 EPS of $1.26 beats by $0.37.
- Revenue of $1.54B (-11.5% Y/Y) beats by $100M.
- Shares +0.5%.
Mon, Jan. 25, 3:08 PM
- Philips recently announced its has cancelled a $3.3B deal to sell an 80.1% stake in its Lumileds LED lighting unit to an Asian investment group led by Chinese fund GO Scale Capital. The cancellation follows objections from the Committee on Foreign Investment in the United States (CFIUS), and has sparked concerns about growing regulatory scrutiny of Chinese acquisitions - including deals in which the selling company isn't American.
- Synaptics (SYNA -8.1%), SanDisk (SNDK -11.1%), and Western Digital (WDC -4.5%) have all seen steep losses on a day the Nasdaq is down 0.6%. Synaptics soared last Wednesday after Bloomberg reported the company is getting closer to a deal to be purchased by a Chinese investment group for over $110/share.
- Western has a pending deal to sell a 15% stake to China's Unisplendour at a huge premium to current trading levels. The closing of that deal, meanwhile, affects the terms of Western's pending acquisition of SanDisk. Selling a 15% stake to a Chinese firm is, of course, is very different from allowing the firm to fully acquire a company.
- This morning, CLSA's Mark Heller downgraded SanDisk to Underperform, while citing weakening NAND fundamentals and the potential (given the selloff in Western's shares) for Unisplendour to walk away from the Western deal. He now sees a 25% chance the Western/SanDisk deal falls apart.
Mon, Jan. 25, 9:38 AM
- Citing higher deal risk and weakening NAND fundamentals, CLSA's Mark Heller has downgraded SanDisk (SNDK -1.6%) to Underperform, and cut his target by $16 to $70.
- Heller doesn't think weakening fundamentals will unravel Western Digital's (WDC -2.2%) pending cash/stock acquisition of SanDisk, but is worried about the potential for Tsinghua Unigroup subsidiary Unispendour to walk away from its deal to buy a 15% stake in Western for $92.50/share (107% above Western's Friday close).
- If Unisplendour was to walk away, Heller sees Western shareholders deciding on the SanDisk deal. The deal calls for Western to pay $85.10 in cash and issue 0.0176 shares for each SanDisk share provided the Unisplendour investment has closed prior to the acquisition. If it hasn't, the cash payout drops to $67.50, and the stock payout rises to 0.2387 shares. SanDisk currently trades below $67; deal closing has been forecast to occur in calendar Q3.
- Separately, Western has announced the purchase of over 100 IBM "patent assets" related to distributed storage, object storage, and non-volatile memory, as well as a cross-licensing deal with the IT giant; terms are undisclosed. Western says the purchase will augment an existing portfolio of 10K+ patents and patent applications.
- SanDisk's Q4 report arrives on Wednesday. Western's FQ2 report is due on Thursday.
Fri, Jan. 15, 12:35 PM
- On a day the Nasdaq is off 4.1%, companies with strong PC exposure are seeing even bigger losses after Intel (down 9.2%) beat Q4 estimates and provided healthy 2016 sales guidance, but also reported a slowdown in server CPU sales growth and offered cautious earnings call remarks about Chinese demand and macro trends.
- Intel's Client Computing Group (provides PC/mobile CPUs) only saw a 1% Y/Y revenue drop in Q4 in the face of weak PC demand. However, volumes were down 16%, with desktop, notebook, and tablet CPU volumes respectively falling 9%, 10%, and 33%. A 17% increase in ASPs minimized Intel's revenue drop. Earlier this week, IDC and Gartner respectively estimated PC shipments fell 10.6% and 8.3% Y/Y in Q4.
- The list of PC-related names seeing big losses includes Microsoft (MSFT -4.8%), Nvidia (NVDA -6.7%), AMD (AMD -8.1%), HP Inc. (HPQ -5.2%), Micron (MU -8.9%), Seagate (STX -6.4%), and Western Digital (WDC -6.4%). AMD reports on Jan. 19, Microsoft and Western on Jan. 28, and Seagate on Jan. 29.
- In other Microsoft news, the company has carried out price cuts of up to 17% for Azure cloud computing services, following new price cuts from Amazon, and is reportedly looking to acquire Indian mobile ad network owner InMobi. Google was rumored to be in buyout talks with InMobi last year.
- AMD, meanwhile, has begun shipping its Opteron A1100 (Seattle) ARM server CPU. Seattle, first announced in 2013, sports up to eight 64-bit ARM Cortex A-57 CPU cores, and enters a market also targeted by AppliedMicro, Cavium, and Qualcomm.
Tue, Jan. 12, 5:56 PM
- IDC estimates global PC shipments fell 10.6% Y/Y in Q4 to 71.9M, just a slightly smaller drop than Q3's 10.8%. Gartner is once more a little less downbeat, estimating shipments fell 8.3% to 75.7M.
- For the whole of 2015, IDC estimates shipments fell 10.4% to 276.2M. The firm notes adding detachable tablets to its count would respectively provide ~6% and ~3% boosts to Q4 and 2015 growth rates.
- The Q4 figures suggest Windows 10 (available as a free upgrade to Windows 7/8 users) and Intel's (NASDAQ:INTC) Skylake CPU launch provided only a modest sales lift. IDC: "The PC market continued to face persistent challenges [in 2015] from longer-PC lifecycles and competition from mobile phones and tablets, despite the slowing growth in those markets. However, economic issues like falling commodity prices and weak international currencies, as well as social disruptions in EMEA and Asia/Pacific that disrupted foreign markets were a larger factor for 2015."
- IDC VP Loren Loverde still thinks PC replacement rates will pick up in 2016. "Commercial adoption of Windows 10 (NASDAQ:MSFT) is expected to accelerate, and consumer buying should also stabilize by the second half of the year. Most PC users have delayed an upgrade, but can only maintain this for so long before facing security and performance issues." Counting detachable tablets, IDC expects 1%-2% 2016 growth. Gartner forecasts a 1% decline.
- Lenovo (OTCPK:LNVGY) remained the PC market's top player: IDC estimates Lenovo's shipment share rose 140 bps Y/Y in Q4 to 21.4%. #2 HP's (NYSE:HPQ) share rose 10 bps to 19.9%. #3 Dell's rose 70 bps to 14.1%.
- Apple (NASDAQ:AAPL) and Asus (OTC:AKCPF) were tied at #4 with 7.9% shares - Apple's share rose 110 bps, and Asus' 90 bps. Apple's revenue share could be closer to 15%. Non-top 5 vendors, hurt by their relative lack of scale, collectively saw their shipment share drop 420 bps to 28.7%
- Related tickers: NVDA, AMD, MU, STX, WDC
Mon, Jan. 11, 6:19 PM
- Citing lower market multiples, Deutsche's Sherri Scribner respectively cut her Seagate (NASDAQ:STX) and Western Digital (NASDAQ:WDC) targets by $5 and $15 to $40 and $80. Nonetheless, Buy ratings were reiterated for both names - Scribner believes hard drive demand is stabilizing, and that Seagate/Western's valuations are attractive.
- RBC's Amit Daryanani estimated PC shipments from Taiwanese contract manufacturers (ODMs) fell 16% Y/Y in December, and deemed the figure "slightly negative" for Seagate and Western. He expects a soft 1H16, with potential improvement later in the year.
- Meanwhile, Taiwan's Economic Daily News reported notebook shipments from Taiwanese ODMs are expected to drop 15% Q/Q to 25M (seasonality will likely play a role), with volumes unlikely to recover prior to new notebook launches in Q2.
- Seagate fell 3.7% in regular trading; shares now trade for just 7.4x an FY17 (ends June '17) EPS consensus of $4.22. Western fell 4.7%; shares go for 7.2x an FY17 EPS (ends June '17) EPS consensus of $7.38.
Fri, Jan. 1, 4:53 AM
- Dow: NKE +29%; HD +27%; MCD +25%; GE +21%; V +16%.
- S&P 500: NFLX +135%; AMZN +119%; ATVI +90%; NVDA +61%; CVC +54%.
- Nasdaq: NFLX +135%; AMZN +119%; CTRP +104%; ATVI +90%; NVDA +61%.
- Dow: WMT -29%; CAT -28%; AXP -26%; CVX -21%; UTX -18%.
- S&P 500: CHK -77%; CNX -77%; SWN -75%; FCX -71%; FOSL -67%.
- Nasdaq: MU -59%; WDC -47%; STX -47%; VIAB -46%; BBBY -37%.
Dec. 2, 2015, 7:27 PM
- Whereas 2.5" SSDs cost 11x as much on hard drives on a $/GB basis in 2012 ($0.99 vs. $0.09), they now cost 6.5x as much ($0.39 vs. $0.06), estimates DRAMeXchange. Moreover, with high-density 3D NAND expected to drive major price declines, the firm predicts the delta will narrow to 2.8x ($0.17 vs. $0.06) in 2017.
- Thanks to lower prices, SSDs (generally faster, thinner/lighter, more durable, and less power-hungry than hard drives) are expected to go into 42% of laptops in 2017, up from 26% in 2015. Concurrently, hard drive penetration is expected to drop to 59% from 74%. DRAMeXchange's Alan Chen: "Branded PC vendors and channel distributors are holding back on their SSD purchases due to lower-than-expected notebook sales. However, 256GB SSDs will be moving close to price parity with mainstream HDDs in 2016, so the adoption of SSDs in the business notebook segment will rise."
- The report might have weighed on hard drive giants Seagate (NASDAQ:STX) and Western Digital (NASDAQ:WDC): Seagate fell 5.4% and Western fell 2.4% on a day the Nasdaq dropped 0.6%.
- Western is less than two months removed from announcing a $19B deal to buy NAND flash/SSD giant SanDisk. Seagate has formed a NAND partnership with Micron, but has opted not to buy a NAND manufacturer. CFO David Morton defended the strategy during a recent conference talk (transcript). "I don’t think NAND is going to be hard to access in the next two to three years ... I believe that there’s a lot of changing nodes going on in this space, whether if it’s 2D, 3D, cross-point and so forth. And so I look at more from optionality perspective and then I’ll able to participate and have meaningful relationships with all the other individual [suppliers]."
Nov. 16, 2015, 3:16 AM
- China's Tsinghua Unigroup is planning to invest 300B yuan ($47B) over the next five years to build the world's third-largest chipmaker and confirmed it was in talks with a U.S.-based company about a deal that could be finalized by the end of November.
- The state-owned tech firm declined to give more details of the transaction but said buying a majority stake was unlikely as it was too "sensitive" for the U.S. government.
- Over the last few months, Tsinghua prepped a $23B bid to acquire DRAM/NAND flash giant Micron (NASDAQ:MU) and took a 15% stake in Western Digital (NASDAQ:WDC).
Western Digital Corp. engages in the development, manufacture, and provision of data storage solutions. Its product portfolio includes hard disk drives and solid-state drives (SSD) marketed under the HGST, WD, and G-Technology brands. It also offers mobile drives for the notebook, PC, and gaming... More
Industry: Data Storage Devices
Country: United States
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